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Carl Icahn's dangerous dance with Apple

LONDON -- Carl Icahn is a tech investor's new best friend. The crusty old raider, who has a stable of younger technology-minded money managers, has been pounding the table demanding Apple CEO Tim Cook buy back

The crusty old raider, who has a stable of younger technology-minded money managers, has been pounding the table demanding Apple CEO Tim Cook buy back $150 billion in additional shares.

Apple already plans to buy back $100 billion in shares, including $16 billion worth last quarter. Icahn probably pounded the dinner table he and Cook shared recently for their much-reported bread-breaking at Icahn's New York apartment. Apple's cash stash currently sits at a whopping $145 billion but only $43 billion is in the U.S., which is why Icahn wants to float bonds to cover a buy back.

Icahn says he has claimed a sizeable stake in Apple, and he wants Cook to take advantage of low interest rates to issue bonds to finance the additional buyback. While Icahn is wont to wax aimlessly on CNBC about what a great company Apple is and how loyal its customers are, the activist investor probably does not care about Apple employees or the future of the Cupertino, Calif., company. He's looking for a quick killing before he's on to the next thing, which is what he does.

That's not to say that Apple — or other big tech names, for that matter — shouldn't return more cash to investors, whether in the form of dividends or buybacks. But Icahn's interest in Apple is no different than his previous investments in other tech giants, such as Motorola and Yahoo.

By the way, giving back cash doesn't always lift stock prices. Microsoft has given back almost $200 billion, and its stock price has been mostly flat for more than a decade. Buybacks and dividend yields by the likes of Microsoft and Intel — while hefty for tech companies — still tend to lag below levels of other industrials of similar market-capitalization size, which isn't enough to move the needle for most investors because of the higher amount of risk inherent in the tech sector, says technology analyst Bill Whyman of ISI Group, a financial research boutique.

But that hasn't stopped tech companies — especially more-established ones — from increasing their willingness to part with some of their vast cash hordes. They're doing this by increasing their dividends and capital allocation plans. Tech companies now return about $130 billion a year to investors in the way of dividends and buybacks. As a result, tech's dividend payout ratio has jumped 14% and doubled in size in the past two years. What's more, the number of tech companies that pay dividends has jumped 55% in the past year alone, according to Whyman's calculations.

Despite the rising number of tech companies doling payouts, the aggregate amount of cash in the coffers of the tech sector hasn't been dampened, and in fact continues to climb, hitting $566 billion in June. That's 20% of the aggregate market cap for the entire tech industry, which is higher than other sector. Silicon Valley's penchant for socking away cash has long been a bone of contention among Wall Street money managers. Tech company CEOs have contended they need to be flush with cash to be able to invest in new technologies through acquisition. Competition and the next new thing can emerge quicker in tech than with other sectors, or so they argue.

While that mentality is changing, shareholder-friendly cash management hasn't necessarily spurred higher share prices for tech stocks. Even with increased cash return, tech's valuation continues to lag the S&P, and the amount has widened, Whyman says.

Will tech companies get rewarded for returning cash to shareholders? Which ones?

Where cash return comes in the form of dividends — as opposed to share buybacks — Whyman thinks that there is potential for higher payout ratios and greater dividend yields from certain enterprise software companies that are more mature but carry lower risk. "This won't work for what we've called 'growth tech,' but mature tech is transitioning from growth to value, and cash return is a big part of that story," Whyman argues.

Oracle, the business software maker, chip-designer Altera, and e-commerce giant eBay are among the tech companies that boast the best combination of high-quality cash return with the ability to increase payouts while facing relatively less secular risk, Whyman says.

Another group of big tech companies that are strong candidates for returning cash include storage giant EMC, Google and software outfit Adobe Systems. These companies enjoy strong businesses, which Whyman refers to as "firepower," as well as reasonably low secular risk.

The bond market seems to be betting that Icahn's buyback gambit isn't likely to succeed in the short-term, but that doesn't mean that more tech companies won't continue to increase their cash payouts to shareholders.

Table or no table.

Mark Veverka is a technology columnist with more than 25 years of financial journalism experience. He was previously a columnist at Barron's, The Wall Street Journal and the San Francisco Chronicle.